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The Employee Ownership Update

Corey Rosen

November 3, 2005

(Corey Rosen)

Presidential Advisory Panel on Federal Tax Reform Recommends Replacing All Defined Contribution Plans with New Retirement Program

ESOPs, 401(k) plans, profit sharing, and other plans would be eliminated

The Presidential Advisory Panel on Federal Tax Reform (the "Advisory Panel") has issued its final report (the "Report"), which proposes eliminating all forms of defined contribution plans and replacing them with a new, simplified retirement plan. The new proposals are very similar to the retirement reform proposals proposed by the Bush Administration two years ago. These proposals never got past the committee hearing stage, thanks in part to strong opposition from the existing retirement plan community.

The Report proposes a new "Save at Work" plan that would operate similarly to a 401(k) plan but with simplified rules and an automatic enrollment feature. All existing defined contribution plans, which include employee stock ownership plans (ESOPs), would be eliminated and replaced by the "Save at Work" plan. However, the Report does not specifically mention ESOPs, even when listing existing plans that would be replaced by the new plans, e.g., "The employer-provided Save at Work retirement plan would combine 401(k), SIMPLE 401(k), Thrift, 403(b), governmental 457(b), SARSEP, and SIMPLE IRA plans into a single type of plan that could be easily established by any employer."

The Report actually sets out two options for tax reform: the Simplified Income Tax Plan and the Growth and Investment Tax Plan. Defined contribution plans such as ESOPs would be eliminated under either plan. Both plans would also repeal the alternative minimum tax (AMT), which in the employee ownership community is of particular interest to those who deal with incentive stock options.

The Advisory Panel set out an aggressive and sweeping agenda for tax reform that has been much covered in the news. Among other controversial features, it would eliminate deductions for employer-sponsored health plans, eliminate deductions for state and local taxes, and sharply reduce the mortgage interest deduction. "Save for Retirement" accounts would allow individuals to put up to $10,000 per year in a Roth-IRA type of retirement investment. "Save for Family" accounts, also with a $10,000 annual limit, would replace existing education and medical accounts, and could be used for retirement, health, education and training, or a down payment on a home.

Although Congressional committees may hold hearings on the proposals, it seems more than fanciful that they would ever serve as the framework for a major restructuring of the tax code. Individual recommendations, however, may be considered, although observers generally see this, and similar commissions, as more likely to produce intellectually elegant designs than politically palatable programs. Given the lack of interest in similar retirement proposals from the Administration in the past, it seems highly unlikely, if not inconceivable, that these recommendations will go any further.

The Advisory Panel has nine members. The vice-chair is former senator John Breaux (D-LA), who has been a supporter of ESOPs.

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